10 top tips on how to avoid common financial mistakes made by franchisees
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Starting a new business and becoming your own boss can be exciting and terrifying in equal measures. The prospect of running a business how you want to run it, work the hours you want to work and have the potential to earn an uncapped income are some of the key factors that convince an entrepreneur to take the plunge and step into business ownership.
Deciding to start the business is the easy step, the phases of business planning, research, financial projections, and actual start-up are what will cause the most sleepless nights. Fortunately, when you invest in a franchise business all those headaches can quickly be resolved. Somebody has already been through the process and has established a successful operating model which you can simply adapt.
However, even with this support there are still several common financial mistakes that can be made which may have an adverse affect on the business. Here are 10 top tips to help avoid some of the most common financial mistakes from being made:
1. Plan your way to success
Neglecting to have developed an accurate business plan is a bit like not having inspected your car or planned directions when starting out on a new car journey. How do you know the car is in a fit condition? Are you going to arrive safely and most importantly how do you get to your destination? Relating this to your business, if you have no plan, how do you know what needs to be undertaken to achieve success and how do you adapt when you face potential barriers?
2. Understand your financial projections
Avoid making financial mistakes. Develop a projected profit and loss account which will assist with evaluating profitability along with a cashflow forecast to establish how much money you will need during the start-up phase. There will always be several large outgoings from the outset and sales within the first 6 months can often be slow. Establishing clear financial projections which can be adapted throughout the business journey is crucial to the success of the venture.
3. Set realistic KPI’s
KPIs (key performance indicators) allow a business to make sure they are on the right track (the same as directions help you with your car journey). You need to be constantly reviewing and keeping an eye on your performance. The ability to compare this with your financial projections is incredibly important and the setting of KPIs will allow this to happen.
4. Understanding the finance
Using the car analogy again, you cannot just jump into the car and start driving, you need to be given lessons to understand what is required and how to drive correctly and safely. The same can be said about understanding the important financial elements of a new business. You need to understand profit and loss, appreciate the purpose of your balance sheet and make sensible and informed decisions. Having the ability to spot potential problems through accounting trends allows you to act on them before they have an adverse effect on the business.
5. Ensure you have the right amount of funding
Any new franchisee will need a healthy bank balance. Many will opt to fund the business out of their own pocket or just borrow a small amount of money to assist with the first 6 months of business. The key issue here is that there is always something that has not been accounted for which then eats into the business cash reserves. When this happens, it is incredibly difficult to secure additional funding as lenders will be concerned about the ongoing viability of the business. Funding secured at the start-up phase is vitally important, it is also a much easier application process. Think about taking some funding from the outset even if it just sits in your bank as a safety net.
6. Do you really have to know everything?
We are all specialists in our own right but that doesn’t mean we have to know everything about every single element of our business. Financial awareness may not be your specialism, just the same as IT support may not. Surround yourself with the right business professionals. Seek help from a financial partner who can assist with your business planning and forecasting, and if the thought of trying to look after your own IT infrastructure gives you sleepless nights, then again look to outsource it to a trusted partner.
7. Knowing the difference between profit and cash?
Businesses love to talk about their profit levels, “we are going to make xx amount of profit this year” or “last year we made xx amount of profit”. Of course, this is hugely important as nobody wants to run a business that does not make profit. However, something that is equally as important though is ensuring the business has the right amount of cash. You might be making profit, but if you don’t have enough cash available to pay your bills and VAT returns then clearly something is amiss.
8. Explore all your funding options
Businesses often turn to their bank when they need help with funding. For example, if you need new equipment or vehicles for the running of the business then it would be natural to approach your bank for lending purposes. However, what happens when you need to extend credit with your bank? The options available could be limited because you have used up most of your credit with these new purchases. Instead, reach out to your network and find some funding specialists, often they have far more competitive solutions and you are not affecting your credit limit with your business bank.
Make sure you maintain a positive credit score for your business. Pay your bills on time, submit your accounts on time and keep all your business information up to date. A positive credit score will be a major factor when you need to apply for business funding.
9. Make sure your accountant is a key partner
Accountants can be worth their weight in gold providing they understand you, your business and your business model. As with any industry there are some that will react to your needs when you need them to and there are others who will proactively work with you. The proactive ones will be your sounding board, listen to your needs and then tailor their advice and support to suit you. Don’t always just take the first recommended accountant, do your due diligence and make sure they have an interest in supporting you and your ongoing business journey.
10. Plan everything, even your exit strategy
It might seem strange to be talking about an end goal or exit strategy, but it is important to have this clearly defined. Taking steps early and recognising how best to present your business in the most effective and profitable way will be critical. Ideally preparations and plans should be initiated at least 2 years before the exit strategy concludes. Find
About The Author – Chris Morris
Chris is the co-founder of both NGI Finance and NGI Franchise Funding, running the day to day of both businesses. Having previously worked for Lloyds bank for 20 years where he ran a £200m Asset Finance business in the South East.
Find out more about NGI Franchise Funding by visiting their profile.